Where to stash your extra cash
It’s a dream scenario: You wake up one day, and a windfall enters your life. That tax refund lands, an inheritance shows up at your doorstep … or maybe you’ve finally scored that promotion you’ve been working for — or have found a nice side hustle that will boost your income — and are suddenly bringing in an extra $500 or thousand dollars a month. Whether it’s a one-time influx or extra cash every pay period, the options are endless.
What should you do first? (Hint: Don’t mindlessly spend it!)
This is a situation I see many clients wrestle with. It’s certainly a good problem to have — but figuring out the next step can be confusing. It can be tempting to say you’ll just figure it out later and, in the meantime, do some shopping, grab dinner and drinks out with friends and plan some fun weekend trips away. Before you know it, you’re used to those extra luxuries … so you keep spending without a plan. But you’re missing out on an opportunity to make some serious headway on your long-term goals.
If you have revolving debt, the easy answer is to up your payments to knock it out more quickly. If you aren’t fully funding your 401(k) or IRA accounts, that’s another great option. According to the Economic Policy Institute, the average retirement savings of American families ages 32-37 is $31,644. Boosting your retirement savings now by $500 a month would turbocharge that number quickly – your savings could grow to over $250,000 in 20 years. (This includes a starting balance of $31,644 and a 4% annual rate of return.)
But if you want to take a closer look at some of your non-retirement goals, like saving for the down payment of a home or preparing for a kitchen renovation, another solution might be to split the difference, and stash an extra $250 per month into your retirement accounts and $250 into your savings account. The answer will depend on what is most important to you and your own personal financial situation.
One size does not fit all. Your income, expenses and financial goals will vary from your friends, neighbors and colleagues’. From emergency savings to debt reduction, retirement objectives to living for today, and cash flow to insurance needs, your personal financial plan should be tailored to you and fit your needs only. A fee-only CERTIFIED FINANCIAL PLANNER can help you make the right decisions.
Windfall or not, a personal financial plan can help you with making your money work harder for you. Kelly Luethje is a CERTIFIED FINANCIAL PLANNER™ professional and founder of Willow Planning Group, LLC. She provides financial education and guidance to help you live life on your terms. Kelly can usually be found on a mountain, or by a lake, working virtually with clients across the country.